Ratio of taxed to tax deferred savings at ER

[nun]

I suppose one definition of ER is doing it before your tax
deferred retirement savings are available to you,
at least not without doing "substantially equal payments".
So I'd be interested to know at what age you retired and what
%age of your investments where in taxed vs tax deferred
accounts. I seems to me to be critical to have substantial
after tax savings to ER.

I'm 44 and planning to retire in 4 years time. After I've realized
the equity in my house and bought a smaller place outright
I should have a 50/50 taxed to taxed deferred ratio

 

[Nords]

I should have a 50/50 taxed to taxed deferred ratio

That's an interesting question-- I'd never thought about it before.

I retired four years ago at age 41 but I'm not sure what our percentages were back then. Quicken claims that 22.87% of our ER portfolio today is in tax-deferred/tax-free investments. I suppose if we'd invested in better funds that we'd have a higher percentage. If we'd invested it all in NASDAQ puts we might have a completely different percentage.

For our entire working years our tax-deferred investments have been limited to IRAs. The military didn't even have a TSP until 2002, five months before I retired, and didn't raise its contribution limits to the IRS numbers until this year. I suspect that our tax-deferred/free basis is a much smaller number than most portfolios, and that's all about opportunities.

In a few more years our IRAs will be a bigger percentage of our portfolios. We're hoping not to have to touch them for another couple decades.

 

[2B]

Unfortunately, I can't claim to be ER'ed. I can tell you that I'm over 80% in tax deferred accounts which plays hell with the ER calcs. Right now, I'd be almost immediately into the 72t approach and I'll need a good 15% more to ER than if I had more in already taxed accounts.

It all comes down to math. I have more because of the IRA/401k but now I'll have to pay the tax to get it out. I'm working at building my already taxed accounts to get a little more room.

 

[HFWR]

95% tax-deferred (401K). About to fund a Roth at VG, and start throwing money at that. Still have 10% going to 401k, plus a 6% match, but will use another 10% for taxable and Roth. I like the three bucket idea.

 

[LOL!]

We are under 50 years old. Our taxed:tax-deferred ratio is about 55:45

 

[yakers]

Its an interesting idea to explore but I am not sure there is any kind of correct answer even for particular individuals. I am not retired yet, my wife is retiring in a couple weeks. Most of our income will be from pensions. Then we have deferred comp (403b/TSP) some Roth money, some cash in the credit union and some after tax stocks. We aren't going to change much of the "plan" (or accidental collection of funds).
The only advice I give, if it is available take whatever 401k funds you get a match for and the Roth IRA is a good thing. Other than that its probably to have tax deferred, tax free(Roth) and after tax investments as you can draw from those that work best at any given time. I don't know why the ratio would be fundamentally important if you have enough in the funds.l

 

[nun]

Its an interesting idea to explore but I am not sure there is any kind of correct answer even for particular individuals.

What I'm trying to get at is that to ER you need to have access to your money and if you are going to maximize your investments you'd better not tap those 401ks etc until 59 1/2. So to ER you need to save into both taxed and tax deferred investments. You might make the argument that its more important to save after tax money, after all it will have less time to
grow. Right now I'm saving 1.5 times as much into after tax investments as tax deferred.

 

[astromeria]

DH and I have almost twice as much taxable as tax-defered, but that was more or less an accident of fate: taxable stock options, little or no 401k match, and with both of us working in the software biz, a large emergency fund.

 

[retire@40]

I don't know why the ratio would be fundamentally important if you have enough in the funds.

I would take it one step further and say as long as you have control over your withdrawals, it's not an important ratio.  Despite your ratio, you can take withdrawals to fit your best case tax-efficiency planning for that year and for following years, to the best of your abilities to predict future income streams and the taxation thereof.

Also, front-end planning is more important than back-end planning since it involves a real known.  For example, if you are in the 35% bracket, it makes more sense to contribute to your 401(k) since you know you are deferring a 35% tax now rather than worrying about whether your future withdrawal will be taxed at a higher rate than your current savings.  In the future, your tax may be higher or lower than 35%, but since it is an unknown or at best a probable unknown, it may be an exercise in futility.

So, you plan for the present while being conscious of what could happen in the future, but unless you are very sure of where you will be in the future, you don't let future predictions dictate your present financial decisions, especially when it comes to the taxation of those decisions.  

 

[Papi]

What I'm trying to get at is that to ER you need to have access to your money and if you are going to maximize your investments you'd better not tap those 401ks etc until 59 1/2. So to ER you need to save into both taxed and tax deferred investments. You might make the argument that its more important to save after tax money, after all it will have less time to
grow.

Hi Nun,

I'm trying to understand your argument that to ER you better have enough $$$ in a taxable account.  I plan on ERing in 5-7 years, and I will probably have nearly 95% of my assets in Roths/IRAs.  Using the various retirement calculators and doing the 72t IRA early withdraw plan, I should have a very nice retirement.  What am I missing here??

 

[nun]

Hi Nun,

I'm trying to understand your argument that to ER you better have enough $$$ in a taxable account. I plan on ERing in 5-7 years, and I will probably have nearly 95% of my assets in Roths/IRAs. Using the various retirement calculators and doing the 72t IRA early withdraw plan, I should have a very nice retirement. What am I missing here??

You're doing the 72t so you can get at your tax defered money before 59 1/2 without the
10% penalty. I don't like the inflexibility of the 72t, so I'm trying to avoid it, and hence I need after tax money to live on until 59 1/2. I see the 72t as similar to an annuity, but without the guarantee. I suppose you can do the 25% FI and 75% stocks within the 72t arrangement to protect against down years, but you're locked into it and that's what I don't really like

 

[nun]

I would take it one step further and say as long as you have control over your withdrawals, it's not an important ratio. Despite your ratio, you can take withdrawals to fit your best case tax-efficiency planning for that year and for following years, to the best of your abilities to predict future income streams and the taxation thereof.

Are you assuming a 72t plan to access tax deferred accounts?

Its obviously good to defer taxes, but if you want to ER and leave those tax deferred funds alone to compound over the years until 59 1/2 or even longer you will need after tax money too. Therefore, defer as much tax as you can with with 401ks and IRAs and make sure you go from say the 28% tax bracket to the 15% when you retire (although I see taxes going up steeply in the next 20 years), but you should save just as much after tax in my opinion.

 

[Papi]

You're doing the 72t so you can get at your tax defered money before 59 1/2 without the
10% penalty. I don't like the inflexibility of the 72t, so I'm trying to avoid it, and hence I need after tax money to live on until 59 1/2. I see the 72t as similar to an annuity, but without the guarantee. I suppose you can do the 25% FI and 75% stocks within the 72t arrangement to protect against down years, but you're locked into it and that's what I don't really like

Thanks for the update Nun.

You're right, you are locked into the withdraw rate with the 72t which does reduce the flexibility. My plan is to have a small portion of my assets in a taxable accounts for emergencies while doing the 72t arrangement. My feeling still is that the benefits of the long-term tax deferred accounts (IRAs only, not my Roth) far outweigh the inflexibility of having to do the 72t.

 

[kramer]

Hi Nun,

I am 40 years old and about 75% taxable, 24% tax deferred, and 1% tax free (ROTH). So that gives me some flexibility. There is an advantage to being diversified in your tax situation so that you can mix and match to current tax policy and spending requirements.

I plan to retire in my early to mid 40s, and I have thought about starting a SEPP in my early to mid 50s, mostly for tax reasons, to even out the payments over time. By then, you are not locked into 72(t) for very long, possibly the minimum of 5 years. Also, you will be more sure about your retirement and financial situation.

You can also remove money for medical expenses from your IRA without penalty for the portion of medical expenses (not insurance premiums) that are over 7.5% of your income that year. And this is independent of whether you actually itemize on your taxes. So for a lower AGI ER, this could come in handy, even for high deductible insurance to cover part of the deductible. You could dribble a little out over time up to the top of the 15% bracket.

I just happened to post an example of this earlier tonight:

http://raddr-pages.com/forums/viewtopic.php?t=2458

Kramer

 

[nun]

Thanks for the update Nun.

You're right, you are locked into the withdraw rate with the 72t which does reduce the flexibility. My plan is to have a small portion of my assets in a taxable accounts for emergencies while doing the 72t arrangement. My feeling still is that the benefits of the long-term tax deferred accounts (IRAs only, not my Roth) far outweigh the inflexibility of having to do the 72t.

I can see doing a 72t for 5 years and using minimum distributions, but I'd get worried at doing it for say 15 years with the bigger payout methods. What investment mix do people use in 72ts, can you use an annuity in them?

 

[JohnP]

We're both retired for past 3 years on CSRS and StateTeachersRS Pensions - DW working half-time - No stock options were available for us, and never a match from employers - we tried to max out IRAs, TSP, 403b, Roths in addition to our mandatory contributions to the retirement systems and also saved in taxable low cost Vanguard MF accounts - LBYM works.

Current savings Tax-deferred 41.5%, Roths 2.5%, Taxable Savings 56%

We have yet to tap into our savings - probably won't tap tax-deferred $ until we must.

JohnP

 

[justin]

nun,

not sure if you are aware of this, but you can split your tax-deferred money into multiple IRA's. Then start the SEPP from one IRA and let it run for 15 years (or whatever period you want). If it spits out too much money, save the rest in a taxable account. If it doesn't spit out enough money or is depleted, start another SEPP from a different IRA. You can have more than one SEPP distribution scheme at a time.

 

[unclemick]

Age 62/3

75% tax deferred Trad IRA, 7% Roth(conversion), 15% taxable stock, and 3% cash.

heh heh heh

 

[grumpy]

When we retired at ages 56 and 57 we had just about a 50/50 split between taxable accounts and tax deferred accounts. Since then we bought and furnished a new house so we have drawn down the taxable account somewhat and the tax deferred accounts have grown. Now the split stands at 42% taxable, 58% tax deferred. I don't anticpate having to touch the tax deferred accounts until age 70.5 when mandatory withdrawls kick in.

Grumpy

 

[nun]

nun,

not sure if you are aware of this, but you can split your tax-deferred money into multiple IRA's. Then start the SEPP from one IRA and let it run for 15 years (or whatever period you want). If it spits out too much money, save the rest in a taxable account. If it doesn't spit out enough money or is depleted, start another SEPP from a different IRA. You can have more than one SEPP distribution scheme at a time.

Thanks, I wasn't aware that you can do a SEPP from a single IRA if you have multiple IRAs. I was assuming (wrongly it seems) that the IRS lumped all the IRAs together for the calculation of SEPP. This new wrinkle would let you get at a portion of your tax deferred savings. However, it still doesn't avoid the problem of if you deplete your IRA with SEPPs you'll have to pay the 10% penalty retroactively. This has made me think that if you invested in FI or an annuity inside the IRA so that the return was guaranteed to be more than your required payments you could avoid the possibility of depleting the IRA. What do folks think?

 

[jdw_fire]

nun,

If you are worried about depleting an IRA with SEPPs, use a more conservative method of calculating the payment when you start.  The most consevative way (gives the smallest annual W/D) to compute a SEPP is by dividing the balance of the IRA by your life expectancy.  Using this method you can't deplete the IRA since you recompute the W/D  every year using new account balance and life expectancy, making every W/D less than the account balance.

 

[nun]

nun,

If you are worried about depleting an IRA with SEPPs, use a more conservative method of calculating the payment when you start. The most consevative way (gives the smallest annual W/D) to compute a SEPP is by dividing the balance of the IRA by your life expectancy. Using this method you can't deplete the IRA since you recompute the W/D every year using new account balance and life expectancy, making every W/D less than the account balance.

My ignorance of 72t is showing. What are the rules about determining minimum withdrawals exactly?

On a more philosophical point, if you are fairly young say 40 and had 30k to invest what percentage would you put in tax deferred and what in after tax investments. I think what I'm getting at is this, is it better to defer tax and have to take the money out early with a 72t to ER or to split the money between after tax and tax deferred so you can live on the after tax money and defer tax on the deferred tax money longer? I suppose it all depends on tax bracketts

I fell a spreadsheet coming on

 

[jdw_fire]

Barry C Picker, CPA/PFS, CFP has written an article on that very topic

http://www.bpickercpa.com/articles/iraannuitize.htm

 

[REWahoo]

I fell a spreadsheet coming on

Better watch out, those things can be dangerous. Do you need some help getting up?

 

[jdw_fire]

On a more philosophical point, if you are fairly young say 40 and had 30k to invest what percentage would you put in tax deferred and what in after tax investments. I think what I'm getting at is this, is it better to defer tax and have to take the money out early with a 72t to ER or to split the money between after tax and tax deferred so you can live on the after tax money and defer tax on the deferred tax money longer? I suppose it all depends on tax bracketts

Save as much as you can in tax deferred and then the rest and the tax savings on the tax defered amount  in after tax accounts.  An example to illustrate: assuming your tax bracket is 25% and you can put the entire but only 30k in a tax deferred account, then put the entire 30k in the tax deferred account and put the tax savings of 7.5k in an after tax account.  This will "cost" you no more than putting the entire (and only) 30k in an after tax account (no tax savings) but you will have an extra 7.5k saved for retirement.  Let Uncle Sam help your savings plan as much as possible, in this example an extra 7.5k.